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Food Price Policy in an Era of Market InstabilityA Political Economy Analysis$

Per Pinstrup-Andersen

Print publication date: 2014

Print ISBN-13: 9780198718574

Published to Oxford Scholarship Online: January 2015

DOI: 10.1093/acprof:oso/9780198718574.001.0001

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The Political Economy of Food Price Policy in India

The Political Economy of Food Price Policy in India

Chapter:
(p.339) 16 The Political Economy of Food Price Policy in India
Source:
Food Price Policy in an Era of Market Instability
Author(s):

Kavery Ganguly

Ashok Gulati

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198718574.003.0016

Abstract and Keywords

India did not experience food price spikes during 2007–8 when global prices erupted, partly due to a ban on exports of wheat and common rice. The fiscal stimulus in 2009 to avert economic recession, coupled with one of the worst droughts, led to rising food prices. The nature of food price inflation, however, changed from being cereals-led to high-value products (fruits and vegetables, and protein foods). While food inflation invited severe political protests, the situation did not escalate to any riots or violence. Government has been trying hard to cool down food prices by reining-in fiscal deficit, tightening monetary policy, releasing more grains from public stocks, and distributing subsidized grains through the public distribution system to targeted population. Yet it has not quite succeeded in containing a high level of food inflation, causing concern given the large number of people below the poverty line in India.

Keywords:   India, food price, food inflation, export ban, monetary policy, poverty

16.1 Introduction

In the context of the global food price crisis of 2007–8, India took some big decisions: adopted a very restrictive export policy for essential food articles (e.g., banning exports of wheat and common rice) and not allowing the domestic fertilizer prices (especially urea) to increase in line with global prices. This helped India to contain the food price rise in 2007–8 remarkably well (within 5 per cent to 7 per cent only). But this food price stability did not last long. From mid-2009 on, India’s food prices started rising in the wake of (a) the severest drought in 2009 that India had experienced since 1972; and (b) India injected high doses of ‘fiscal stimulus’ as a part of a synchronized strategy adopted by Group of 8 (G8) and major emerging economies to avert global economic recession in the aftermath of the financial crisis of 2008. High food inflation in India continues until today (December 2012), hovering between 8–12 per cent in most of the quarters (since mid-2009) with occasional easing out in certain months and picking up spikes (even going up to 20 per cent) in some other months. But the composition of food inflation changed from cereals-led in 2009 to the one led by high-value foods (fruits and vegetables, and protein foods) in 2010 and 2011. This changing complexion of food inflation suggests increasing demand pressures emanating from rising incomes.

India as an emerging economy with a growing population is likely to experience increased demand for food. India being the second most populous country and home to a large number of poor in the world (41.6 per cent of the Indian population or 456 million people lived on less than US$1.25 a day in 2004–5 (Chen and Ravallion 2008)) faces a challenge of bringing down (p.340) its food price inflation to economically and politically acceptable levels. In the context of this multi-country study, it is of interest to understand the politico-economic underpinnings of food price policy in India as it may have ramifications not only for neighbouring countries but also for global prices. As Timmer (2011) rightly observes, political dynamics play a powerful role in determining the policy responses particularly in times of rising food prices, and it cannot be truer than in a country like India with a vibrant democracy, and where the government is based on multi-party coalition.

The overarching food policy in India has been driven by the objective of food security for a large and growing population. For this, India has followed the path of attaining almost self-sufficiency in the production of key staples like rice and wheat, and making them available to economically weaker sections at affordable (highly subsidized) prices. The food price policy, therefore, has twin instruments, remunerative minimum support prices (MSPs) for rice and wheat farmers, and subsidized prices through public distribution systems for poor consumers. The export basket of Indian agriculture has been expanding and diversifying. While India is a net exporter of cereals, it is a major importer of edible oils and pulses. However, overall food availability (through domestic production and imports) is reasonably comfortable, and increasing over time in per capita terms. The challenge is more on the distribution front, especially for the poor. Despite highly subsidized staples being distributed through the public distribution system, consumption and nutrition levels of the poor remain low and a cause for much concern. The recent food price crisis has infused even greater urgency to address the food and nutrition security concerns through strategic policy actions placed over the short, medium, and long term.

16.1.1 Overall Economic Performance and Macroeconomic Trends

Despite robust economic growth and significant achievements on many other key economic indicators, India has not been as successful in addressing its concerns related to poverty and food and nutritional security of a large number of vulnerable people. The number of people living below the poverty line (as per the national definition of poverty line) as a per cent of the total population has declined from 55 per cent in 1973–4 to 36 per cent in 1993–4 to 27.5 per cent in 2004–5 and further to 22 per cent in 2009. However the number of poor people has decreased only slightly from 320 million in 1973–4 to 302 million in 2004–5 (as per national estimates, GoI 2010), indicating that India still has a huge burden of poverty, concentrated in less developed states.

Although India achieved high rates of overall gross domestic product (GDP) growth, its agri-GDP growth remained very low. During the last (p.341) decade of the 2000s, agri-GDP growth hovered around 3 per cent per annum, despite the fact that each Five-Year-Plan during this period was targeting at least 4 per cent. Boosting agricultural growth to 4 per cent plus will be critical in reducing poverty even faster given that agriculture employs nearly 58 per cent of the workforce and a larger number of people are dependent on agriculture. While the expenditure on food subsidy is likely to touch US$20 billion with the introduction of the proposed National Food Security Act, approximately US$8 billion on the employment programme, and a fertilizer subsidy bill of US$15 billion, public investments in agriculture remain pitiably low at less than US$5 billion. The major concern with huge welfare and social safety net programmes is the ability to deliver services to the targeted population.

16.1.2 Major Food Crops: Production, Trade, and Consumption

Rice and wheat are the major cereal crops in India accounting for 57 per cent of the area under food grains and 75 per cent of the overall food grain production. Augmenting the availability of food grains has been a policy priority in India arising from food security concerns that emanated in the 1950s and 1960s when India witnessed several episodes of hunger and famine. Although the food grain production has increased manifold and per capita availability of food grains improved, there continues to be an over-emphasis on attaining self-sufficiency and a surplus in food grains, which poses considerable financial and fiscal strain.

Food accounts for a large part of the total monthly budget of an average Indian, although its share has been declining over time and as per the 2009–10 survey estimates, it is still almost 50 per cent of the monthly per capita expenditure (NSSO 2011). However, the low expenditure classes (bottom 30 per cent) spend more than 60 per cent of their monthly expenditure on food. National survey estimates suggest that the demand for cereals has been declining over time driven by changing consumption preferences. The consumption patterns are diversifying towards high-value commodities across rural and urban areas and also across expenditure groups. Rising income levels, changing lifestyles and trends in urbanization are among the key drivers of this change. India has been a net exporter of cereals, especially rice and corn, of meat and fish, of cotton, of oilseeds cake, and a wide variety of other commodities. Its imports of agri-commodites are largely concentrated in edible oils and pulses.

Driven by food security challenges, there have been several policy hiccups in liberalizing grain markets since the 1990s. Although India has moved away from import controls and quotas there still exist knee jerk reactions taking recourse to export controls and bans to augment domestic supplies.

(p.342) 16.2 Food Price Crisis

16.2.1 Crisis Episodes: Trends and Patterns

Since 1947, India witnessed the highest inflation (measured in terms of wholesale price index) in September 1974, when overall inflation reached 33.3 per cent.1 November 1973 to December 1974 has been the worst period of inflationary pressure when inflation did not drop below 20 per cent. Inflation hovered over and above 30 per cent for four consecutive months starting June 1974 (Basu 2011).

A headline inflation accelerated in the second half of 2009–10, and continued to remain high in 2010–11.2 Inflation in India has also undergone structural changes with food inflation being an important driver to begin with in mid-2009 and then outpaced by increasing energy prices post economic crisis (RBI 2011a). India experienced lower food price volatility/spikes in the domestic market in 2007–8. When world prices of food commodities touched new peaks, and domestic food prices, especially for staples, in several countries went up by 20–40 per cent, food price increase in India remained within 5–6 per cent. But the relief was not long-lasting and in 2009, India was hit by a severe drought that set food prices soaring. The increase in food prices was further fuelled by somewhat loose monetary and fiscal policies emanating from the need to provide fiscal stimulus in the wake of averting global recession. Price transmission effects of international prices on domestic prices have been somewhat muted in the context of India, given the continuing ban on exports of rice and wheat during 2007–11, raising the fertilizer subsidy bill to contain the shocks arising from global price spikes in fertilizers. Rather populist measures, like loan waiver, expansion of Mahatma Gandhi national rural employment guarantee scheme (MGNREGS), raising agricultural subsidies, announced ahead of the 2009 general elections, were all dubbed as fiscal stimulus.

The food price index here is defined as the weighted average of the wholesale price index of food articles and manufactured food products. Inflation measured in terms of the change in monthly wholesale price index of commodities year on year has been highly volatile after having touched unprecedented levels. Domestic food prices started flaring up to mid-2009 onward crossing the 10 per cent mark in June 2009, the 15 per cent mark in November 2009, touched a peak of more than 20 per cent in February 2010. Though it slid from those high levels, yet until November 2011, it has remained largely (p.343) in double digits, lately hovering around 10 per cent, attracting a major debate in parliament (Figure 16.1). During this period nearly all food commodities registered a price spike, their contribution varying over a period of time.

The Political Economy of Food Price Policy in India

Figure 16.1 Percentage change in wholesale price index of food articles and manufactured food products (per month this year over same month in the previous year)

Source: GoI, OEA (2012).

The pressure has been on food articles which witnessed a consistent 20 per cent and more inflation during December 2009 until June 2010.3 Flaring up of prices of manufactured food products was relatively short-lived attaining a peak of 19 per cent for two consecutive months, December 2009 and January 2010, and prices started cooling off thereafter.4 However, prices of manufactured food products are once again on an upward swing from 2.4 per cent in March 2011 to more than 8 per cent since June 2011. During the course of the recent price spikes the contribution of individual food items and groups has been varying. To begin with, manufactured food products contributed the most to the rising inflation on food; 56 per cent in the first quarter of 2008, followed by food grains at 23.4 per cent. Over time, the contribution of manufactured food products declined substantially to 3.5 per cent in the first quarter of 2011 and thereafter zoomed to more than 32 per cent over (p.344) the second and third quarter of 2011 (Figure 16.2). The pressure on manufactured food is coming from the rising wholesale price index of edible oils at 16.2 per cent and 14.4 per cent during the second and third quarters of 2011. Within food articles, the contribution of cereals in total food inflation has come down from 30.2 per cent in the first quarter of 2008 to 5.3 per cent in the fourth quarter in 2010 and has risen to over 8 per cent in the last two quarters of 2011. High-value commodities such as fruits, vegetables (highly fluctuating), milk, meat, and eggs are contributing significantly to total food inflation.

The Political Economy of Food Price Policy in India

Figure 16.2 Contribution of various commodities in total food inflation

Source: GoI, OEA (2012).

It is quite evident that the pressure on food inflation is arising from high-value commodities in the sub-group of food articles. This is perhaps explained in terms of the growing demand for these commodities (considering the structural changes in consumption patterns) and the lack of adequate supply responses. This in turn is affected by domestic production, import patterns to fill up the gap, and also fragmented supply chains. This offers an insight into the current policy thinking that holds food grains as the key to food and nutrition security of the nation. With the price pressure lingering on and even worsening in the case of high-value commodities, there is need to address the demand-supply gap.

(p.345) 16.2.2 Price Trends for Key Food Crops

Rice is the staple crop in India, production of which increased at a rate of 1.0 per cent per annum during 1999–2000 to 2009–10. During the same period, area under rice reduced at a rate of 0.52 per cent while productivity increased at a rate of 1.28 per cent annually. A large part of the total rice production is procured by the Food Corporation of India (FCI), together with state agencies. Rice exports from India reached a peak of 6.5 million tonnes in 2007–8, when a ban on exports of common rice was imposed. During 2010–11, India exported 2.28 million tonnes of rice (basmati) worth US$2.4 billion. Common rice exports were opened in September 2011, and during the one year from October 2011 to September 2012; India exported ten million tonnes of rice valued around US$6 billion, becoming the largest exporter of rice in the world.

The wholesale price index of rice started increasing after July 2006 (over the corresponding months of the previous year). This upward movement in monthly rice prices continued until the end of 2008, and thereafter it started declining (Figure 16.3). However, month to month increases (of the same year) in prices of rice was much lower, and Indian rice prices remained much more subdued in relation to international prices of rice (Figure 16.4). This was primarily due to the ban on exports of common rice and increasing production and stocks at home. The domestic prices started rising again in December 2011 in the wake of the opening-up of rice exports in September 2011.

The Political Economy of Food Price Policy in India

Figure 16.3 Trends in wholesale price index of rice

Source: GoI, OEA (2012).

The Political Economy of Food Price Policy in India

Figure 16.4 International and domestic price movements of rice

Note: International prices are of Thai Rice, 25 per cent broken, FOB Bangkok. Domestic prices have been calculated by averaging monthly data across government regulated market yards (known as mandis) in all states available from DES.

Source: GoI, CACP (2011).

Wheat prices witnessed periods of high growth in some parts of 2006, and then again from July 2009 to end of 2009, and therafter precipitously falling (p.346) to price decreases (Figure 16.5). The export ban on wheat and also increased import of wheat together with favourable production helped contain the price rise. But since July 2012, wheat prices have increased by 15 to 20 per cent over the corresponding months of previous year. This has happened despite the government having stocks of more than 40 million tonnes (in November 2012) compared to a buffer stock norm of 14 million tonnes. The large scale procurement of wheat to the tune of 38 million tonnes in the marketing season of 2012–13 (April to June) has left very little in the open market, which is putting pressures on market prices.

The Political Economy of Food Price Policy in India

Figure 16.5 Percentage change in monthly wholesale price index of wheat

Source: GoI, OEA (2012).

Domestic price of wheat is largely in line with international prices except for certain periods of extreme swings in international prices during the last two quarters of 2007, the last quarter of 2010 and first quarter of 2011. After almost remaining flat from 2001 until 2005, the minimum support price of wheat has increased signifcantly.

Maize prices have been fluctuating during this period and hovered around double digit inflation and since January 2011 prices have spiralled rapidly (Figure 16.6).

The Political Economy of Food Price Policy in India

Figure 16.6 Percentage change in monthly wholesale price index of maize

Source: GoI, OEA (2012).

Domestic prices of maize have been relatively stable as compared to periodic fluctuations in international prices of maize. The minimum support price has been moving in tandem with the international prices. In 2008 the (p.347) domestic price of maize was below international price and there was a significant increase in the export of maize during that year.

16.2.3 Price Transmission: Causes and Impact

The degree of price transmission among cereal crops has been influenced by the government through its various policy interventions such as export controls, imposition of minimum export prices, and varying tariffs. But to say that international price movements have no impact on Indian prices will (p.348) be far from the truth. Nevertheless, policy packages safeguard the consumers and producers from the brunt of price spikes and troughs in global prices. For example, during 2007–8 when global prices were surging, India did not witness large price spikes. Support prices were increased to help farmers tide over increasing costs of production as well as to catch up with global price trends (not spikes), though with a little lag. In the case of increasing global prices of fertilizers, the government contained the spiralling of domestic prices by increasing the fertilizer subsidy bill which cost nearly US$16 billion in 2008–9.

Chand (2008, 2009, cited in Acharya et al. 2012) states that India successfully restricted the snowballing of abnormally high international prices in 2007–8 on domestic prices. Although rice and wheat witnessed high price inflation, it was lower than that observed in their global prices. The lack of a strong price transmission effect is largely attributable to a robust domestic production (except 2009–10 when the production was hit due to a severe drought), timely intervention by the government to control price rise in domestic markets, and the containing rise in cost of production due to a rise in global prices of crude oil and fertilizers. As observed by Dasgupta et al. 2011 (cited by Acharya et al. 2012), the domestic price of wheat is weakly and only moderately impacted by international prices due to the policy intermediation of the government (export bans, lowering duties to import and also incentivizing production through an increase in minimum support price). Co-integration test results from Acharya et al. (2012) do not show any co-integration between international and domestic prices of rice. In the case of wheat, the wholesale domestic price and international price are somewhat co-integrated—the speed of adjustment in response to change in international price was 4 per cent.

Although the prices of rice and wheat increased in late 2009, the increase was less than the international prices. The global price inflation on rice fluctuated between 206 per cent in April 2008 and 4.7 per cent in March 2009. In contrast, domestic inflation on rice ranged from 8.7 per cent in April 2008 to 17.1 per cent in February 2009. In the case of wheat, global inflation declined to negative in March 2009 from 83 per cent in April 2008 whereas domestic inflation on wheat hovered between 7 per cent and 5 per cent during the above period.

The price surge in 2009 can be partly attributed to the bad agricultural year when food grain production suffered a set-back. It was the worst drought year since 1972. Nearly 59 per cent of the Indian districts received deficient/scanty rainfall. The actual rainfall was 23 per cent less than the normal monsoon rainfall (GoI 2010). Although the government took immediate steps to augment supply from existing stocks, and through publicly managed distribution centres, high food inflation persisted. It drove the government (p.349) to look at medium- to long-term measures much through the existing public programmes geared toward augmenting productivity (for example, Rashtriya Krishi Vikas Yojana, National Food Security Mission, Second Green Revolution).

16.2.4 Key Drivers of Food Price Inflation

Food inflation is being driven more by non-cereal commodities and the phenomenon is largely demand-driven. Although there are supply-side issues that need to be addressed, increasing income levels are fuelling food prices. The soaring prices of protein rich food (meat, fish and eggs, milk and milk products) reflect the rise in demand owing to rising income levels and changing lifestyle. The price spikes in fruits and vegetables can be attributed to a large extent to fragmented supply chains and less so to supply constraints, although a detailed study on what is actually driving up prices of fruits and vegetables in not available. There is a widening gap between the prices received by farmers and that paid by the consumers due to a large number of intermediaries and fragmented supply chains, High taxes on agricultural commodities, market fees, and high fees charged by the commission agents in government-regulated markets and increasing fuel prices further fuel prices.

In brief, the food inflation in India has been driven by both supply and demand factors, depending upon the commodity under consideration. For commodities like edible oils, and pulses, there are clearly serious supply constraints, and rising demand is being met by huge imports. Wheat and rice have been largely insulated from global spikes, and it is largely the domestic policies (MSP, procurement, stocking, and distribution) that influence their prices. For fruits and vegetables, supply is not as much an issue, but fragmented supply chains have often contributed to the price spikes.

16.3 Key Policy Responses

Anti-inflationary policies adopted by the Government of India typically involve fiscal and monetary measures, the rationalization of excise and import duties on key commodities to safeguard the interests of the consumers, the use of liberal tariff and trade policies to manage demand-supply situation of key commodities, and the strengthening of the public distribution system to improve availability and accessibility of food. In addressing the broader issue of food and nutrition security, reforming the existing social safety net programmes (improving the delivery mechanism, moving from physical transfer to cash transfers), procurement and stocking policies have been on the policy agenda. Long-term policy measures with a focus on boosting agricultural (p.350) production in a sustainable manner has been emphasized, along with reforming agricultural marketing practices to cut down the marketing margins.

16.3.1 Domestic Price Policies (Consumer Prices, Minimum Support Prices (MSPs))

Increasing retail prices have invited varied responses. For example, when prices of pulses shot up, the government took measures to make available other varieties of low-priced pulses through government managed retail outlets. The issue price at which subsidized food grains are distributed to people under the public distribution system did not undergo any change during this period.

MSPs of cereal crops have seen a significant increase in order to incentivize production given the rising cost of production. After six million tonnes of wheat import in 2006–7, and fast rising international prices of wheat and rice in 2007–8, the MSP of wheat was increased by more than 30 per cent in 2007–8 over 2006–7. The MSP of rice, maize, and pulses increased by 30–50 per cent in 2008–9 over 2007–8, to catch up with rising global prices and compensate farmers for rising costs of production.

16.3.2 Trade Policies (Export Bans, Import Tariffs, Exchange Rate Policies)

The price control measures taken by the government included selective bans on exports as observed in the case of rice and futures trading in food grains, zero import duty on selected food items, among other measures pertaining to key food items. Larger quantities of rice and wheat were released from buffer stocks to ease pressure on domestic prices.

In response to rising global prices of food grain, the government banned wheat exports in February 2007 and common non-basmati rice exports in October 2007. About three months later, an export quota was opened for Bangladesh followed by very small export quotas of both rice and wheat for a number of other South Asian and African countries honouring the existing commitment. These highly restrictive export policies mostly remained in place until early September 2011. The rice export restrictions (which did not apply to existing export contracts) began to affect physical exports in a major way around March–April 2008. The government finally lifted the ban on wheat and non-basmati rice exports up to two million tonnes each (as in September 2011). While estimates for the financial year (April to March) 2011–12 show that rice exports have reached 6.75 million tonnes, wheat exports are not more than one million tonnes given the lower international prices.

(p.351) 16.3.3 Increased Agricultural Production (Input Subsidies, Investment, Enhanced Extension)

Input and food subsidies outpace investments in agriculture (Figure 16.7). Food and fertilizers account for the giant share of total agricultural subsidies and both have been spiralling over time. Food, fertilizer, power and irrigation subsides together account for 15.1 per cent of agricultural GDP in 2009–10 up from 7.8 per cent in 1995–96. Food and fertilizer subsidies account for the larger share of agricultural subsidies and their share peaked to 74.3 per cent in 2008–09, when world prices of food and fertilizers peaked.

The Political Economy of Food Price Policy in India

Figure 16.7 Composition of public expenditure in agriculture: 1993–4 to 2009–10

Source: GoI, CACP (2012).

In order to protect farmers from rapidly increasing fertilizer prices in the world market, the government provided subsidies of about US$16 billion in 2008–09.

In February 2008, the finance minister announced a relief package for farmers which included a complete waiver of loans given to small and marginal farmers. The US$ 14.9 billion agricultural debt waiver and debt relief scheme included the total value of the loans (US$12.4 billion) to be waived for thirty million small and marginal farmers and a one time settlement scheme (OTS) (US$2.5 billion) for another ten million farmers. This loan waiver scheme has been criticized widely as a populist measure (p.352) ahead of the 2009 general elections in India and also for the fact that this scheme did not include a large number of farmers who depend on informal sources of credit.

16.3.4 Larger Public Programmes to Boost Agricultural Productivity

The urgency to boost agricultural productivity particularly food grains resulted in the launching of the National Food Security Mission (NFSM) 2007–8, a flagship programme aimed at boosting the production of rice (by ten million tonnes), wheat (by eight million tonnes), and pulses (by two million tonnes) by 2011–12. The geographical coverage includes the potential districts with a heavy representation of the eastern states. During 2008–9 nearly 50 per cent of the NFSM-rice districts, 50 per cent of NFSM-pulses districts, and 33 per cent of NFSM-wheat districts have recorded a 10–20 per cent increase in productivity compared to 2006–7 (GoI 2010). The Rashtriya Krishi Vikas Yojana (RKVY) or the National Agricultural Development Programme (NADP), with an outlay of Indian rupees (INR) 250 billion for five years, has provided the much needed impetus to strengthen state outlay for agriculture. The Second Green Revolution aims at shifting the cereal basket to the eastern region, which is largely rain-fed in nature and with lower yield levels providing scope for expanding the production frontier.

16.3.5 Safety Nets (Public Distribution System, Food for Work, Cash Transfers)

India has a legacy of social safety net programmes to help improve people’s economic access to food with a particular focus on the poor and vulnerable. However, these programmes have not been very successful in improving access to food and hence improving nutritional and health outcomes.

Cash transfer programmes as an alternative to physical transfer of grains is being discussed along with a reform of the existing public distribution system and cash transfer programmes.

16.3.6 Procurement, Stocking, and Other Marketing Policies

There is a strong policy advocacy by a section of the think tank and policy makers to decentralize and eventually downsize the operation of parastatals in India learning from some of the international experiences (within the Asian region). Agricultural markets particularly that of food grains have been closed to market competition and highly distorted given the controls and (p.353) regulations (for example: procurement at minimum support price often less than the market price, compulsory levy on rice millers). Procurement levels have increased over time and have reached unprecedented levels in recent years. From 11.2 million tonnes of rice and wheat in 1980–1, procurement has increased to 56.5 million tonnes in 2010–11. Procurement of wheat in particular more than doubled in 2008–9 at 22.7 million tonnes from eleven million tonnes in 2007–8 (Figure 16.8).

The Political Economy of Food Price Policy in India

Figure 16.8 Procurement of rice and wheat for the central pool

Source: Food Corporation of India (2011).

With a record production of food grains, an export ban on rice and wheat and increasing procurement, the grain stocks are much in excess of the buffer stock requirement. India had accumulated 64.7 million tonnes of rice and wheat in June 2002, which it had to later dispose by an export subsidy. The stocks plummeted to 12.4 million tonnes in October 2006 only to increase to sixty-four million tonnes in July 2011 against a buffer norm (including strategic reserves) of thirty-two million tonnes (Figure 16.9). As in June 2012, grain stocks have reached a record high of eighty-two million tonnes.

The Political Economy of Food Price Policy in India

Figure 16.9 Stocks of rice and wheat with the central pool (up to October 2012)

Source: Food Corporation of India (2011).

The large food grain stocks pose a huge financial burden on government and there are reports of grain damage owing to lack of proper and adequate storage facilities. Despite structural changes observed in consumption patterns from cereals to high-value commodities, food grains continue to be the mainstay of food security in India. There is very little scope for private sector participation in grain marketing given the controls that are in place arising out of food security concerns. It is difficult to liberalize the grain markets extensively owing to food security concerns and political (p.354) will driven by the mandate to provide food for all. Efforts are on to liberalize high-value commodity markets such as fruits and vegetables which do not directly and largely impact the food security concerns. In a recent move (September 2011), the central government has asked states to lift all restrictions on the movement of fruit and vegetables, in order to eliminate intermediaries, reduce wastage, and tame the stubbornly high food inflation (Sikarwar 2011).

16.3.7 Other Policies (Environmental Policies and Land Acquisitions)

Because agriculture is dependent on monsoons and natural conditions, increasing environmental stress and climate change impacts on sustainable food production are of concern for India. The frequency of droughts and erratic climatic conditions are increasing over time. The inter-governmental panel on climate change and the India meteorological department reports a 2 to 4 degrees increase in mean temperatures (FAO-GOI Mission 2009). Production losses in wheat are likely to be around six million tonnes (7 per cent of the current wheat output) for every one degree increase in temperatures (AO-GOI Mission 2009). Also, the increasing pressure on water and soil in the cereal growing states in north India has necessitated taking the second green revolution to eastern India, which is water abundant and where environmental conditions are more favourable.

(p.355) 16.4 Political Economy Context

16.4.1 Key Decision-making Actors

India has a coalition government. The executive office of the Prime Minister is responsible for the day-to-day functioning of the government. Given the parliamentary form of government, all major policy decisions that require legislative clearance are tabled in the parliament. The central government together with the Ministry of Food, Consumer Affairs, and Public Distribution and the Ministry of Agriculture in consultation with state governments and other ministries are at the helm of agriculture and food price policy-making. In his address at the Second Annual Conference of Chief Secretaries on 4 February 2011, the prime minister emphasized the need to augment agricultural productivity together with a paradigm shift in institutions to contain escalating food prices. He pointed out that the state governments need to be proactive in bringing about these changes—particularly reviewing the scope of the amended Agricultural Produce Market Committee Act, feasibility of waiving market and other taxes. He also reiterated the need to reform the public distribution system, and create adequate storage facilities for increasing stocks of cereals. Rising food prices indicated gaps in supply chain management which need to be strengthened by creating a level playing field for the organized retailers (GoI, PMO 2011). The cabinet approval to foreign direct investment (FDI) in multi-brand retail (that includes food retail) in September 2012 was long overdue. This is held as a break away from the policy paralysis that the ruling government has been criticized for by various stakeholders both national and international. Implementation of the policy is likely to facilitate enhanced FDI inflows, generate employment opportunities, usher in global best practices, which altogether have the potential to benefit consumers and farmers and invoke greater supply chain efficiencies in the agricultural sector and development of critical backend infrastructure.

States have a distinct role to play in the area of agriculture policies given that agriculture is a state subject under the provisions of the Constitution of India. The states have the authority to impose taxes and levies (compulsory selling to the state agencies) on marketing of agricultural commodities and this includes rice and wheat. Punjab imposes statutory levies (taxes) of 14.5 per cent on wheat, which has driven the private sector away from markets, and hence the state has almost a monopoly over procurement. For rice millers, there has been an indirect taxation given that they have to sell 50 to 70 per cent of the milled rice to state agencies at pre-determined prices. Also, in Madhya Pradesh, a bonus of INR 100/quintal over and above the MSP resulted in a record production and procurement of wheat in the state resulting in an overflow of wheat stocks in the state.

(p.356) The Reserve Bank of India also plays a critical role. It reversed its expansionary monetary policy stand beginning October 2009 by raising the cash reserve ratio by a hundred basis points and the policy rate or the repo rate by a cumulative 275 basis points; the effective tightening was about 425 basis points (RBI 2011b).

The Ministry of Finance continuously monitors the food price situation, and one of the critical steps is to rein in the rising fiscal deficit, which in many ways is responsible for the flaring up of prices. A road map to bring it down to manageable levels of 3 to 4 per cent from its current level of more than 5.5 per cent, over a period of five years has been a policy priority. But given the high fuel prices, and the impending National Food Security Bill, it remains challenging to see how and when it can be done.

The Planning Commission has also been actively involved in suggesting measures to contain price surge and tame inflation. The opposition political parties play an important role in putting pressure on the government to be more proactive in controlling rising food inflation. In the context of the recent petrol price hike, one of the key alliance partners threatened a pull out if the government did not roll back the hike in the interest of the common man. Within a week of the prime minister stating no roll back, petrol prices were slashed.5 Over the period of the food crisis, opposition parties have staged protests against rising prices mobilizing common people around the country, demanding government action on containing rising food prices. The National Advisory Council (comprising the political representatives, policy makers, think tanks, and academia) has been quite influential in pushing the National Food Security Bill (which is now pending with the Parliamentary Committee to be examined) which gathered momentum in the wake of high food inflation. Research institutes (national as well as international) have been involved in analysing the trends in food prices, engaging in dialogue with the government, policy makers, and also the media to understand the situation and brain storm on the potential ways of containing high prices and smoothening them over time.

In the wake of high food price inflation, the Confederation of Indian Industry (CII) National Council on Agriculture has sought structural changes to augment growth in the farm sector, linking the farmers directly to the retailers and processors. It also recommended an introduction of input stamps whereby the farmers have the choice to avail the input subsidy that they require. CII has also suggested reforming the land lease markets in agriculture to enable the leasing of land and benefit from the economies of scale. (p.357) It considers opening up multi-brand retailing to FDI will be critical in developing supply chains, and facilitating direct firm-farm linkages (Menon 2011).

While there have been no reports of major riots over increasing food and fuel prices in India, there was a report of public furore over rising prices in Bihar.6 There have been mass protests organized by farmers and other lobbies in various parts of India, and also those organized by the opposition political parties, demanding the government to be proactive and committed to protect the interests of the common man/woman and not subject him/her to the onslaught of rising prices.7 The issue of high food inflation led to a disruption of the parliament proceedings several times over the past few years by the members of the opposition parties.

The media has been active in reporting increasing food prices and the reaction across various segments of the society. International institutions like the World Bank, the Food and Agriculture Organization (FAO), the Asian Development Bank, and others have been continuously tracking the global trends in prices and the forces behind them. The views expressed by international think tanks have had their impact on the policy-thinking in India as observed in their being more cautionary and having a protectionist approach with respect to trade (export controls and bans) and in general procurement and stocking policies with respect to grains (resulting in record procurement and surmounting stocks of rice and wheat).

16.5 Conclusions

The period of high food prices since mid-2009 has raised concerns and challenges, although for India as a developing country and home to a large number of poor and malnourished people, ensuring food and nutrition security has always ruled the policy domain. The policy makers have been confronted with the difficult task of balancing higher economic growth and improving the social welfare of the masses. The ruling coalition government is committed to ensuring inclusive growth wherein people from different economic and social backgrounds are part of the economic growth process. It is met with fierce criticism and disruption of parliamentary proceedings by the opposition parties, putting pressure on the government to control surging prices. Rather than providing an actual solution to the problem of rising food prices, the opposition was more vocal to downgrade the efficacy of (p.358) the ruling government, failing to protect the interests of the common man/woman. Policy decisions to hike transport and cooking fuel prices were met with severe criticism as these were seen to further fuel food prices. High food and fuel inflation is seen to thwart the high economic growth that India has achieved despite the fragile global economic scenario.

While short-term measures were undertaken to address the prevailing crisis, emphasis was given to medium- to long-term policies to increase food supplies and access. The international food price increase did not change the Indian agricultural and food policy which was already geared towards ensuring sustainable agricultural production to ensure food security of the masses, although it provided the extra momentum. Immediate measures like offloading stocks in open markets, reducing tariffs on imported food commodities, raising price support or imposing export controls and bans are the general course of action taken time and again when prices were flaring up beyond tolerable limits.

As illustrated by the National Food Security Bill, perhaps the period of high inflation and increasing vulnerability of poor people to food price shocks prompted the speeding up of food security deliberations. The proponents of the Act had more reason to push for the enactment of the bill without taking into consideration the fiscal and financial implications. Reforming the public distribution system versus replacing it with other alternatives such as cash transfer, coupons/stamps are also being debated in the country. Recent research also reveals that the existing public distribution system has a leakage of around 40 per cent. Given this, a strategic move towards conditional cash transfer can be a real game changer. But some have expressed suspicion of the ability to do cash transfers in a society where financial inclusion of the poor remains a major challenge. However, under the Aadhar project, there are plans to install one million micro-automated teller machines (ATMs) all over the country and use finger prints and Aadhar’s unique number to widen the financial inclusion, and the government has already taken a bold decision to move towards cash transfers for twenty-nine schemes. Although the food and fertilizer subsidy is not currently in this scheme, the Commission for Agricultural Costs and Prices (CACP) has recommended piloting a food subsidy at a hundred places, to be transferred through cash. This is a potential weapon to contain leakages in the system and enhance the effectiveness of social safety programmes. While the objective of seeking the food and nutrition security of the masses remains the same or is rather more highlighted due to the crisis, the means of achieving it is still debated. There have been suggestions of downsizing public procurement and storage of grains, particularly the operations of the Food Corporation of India, and allowing greater private sector participation and also allowing markets to operate. The current inflationary trends in India are observed to be a mix of demand-driven factors (p.359) and also supply factors that resulted in spikes and fluctuations in price movements. Erratic supply conditions owing to weather and climatic changes resulted in rapid price fluctuations. On the other hand, large scale food subsidies have resulted in the accumulation of large stocks of wheat and rice. While the evidence is weak, it appears that poverty levels have been declining. One finding is that despite rising food prices during 2007–12, real farm wages have increased at 6.8 per cent per annum. Given that landless labour is generally at the bottom rung of the economic ladder, this is heartening news to policy makers.

India is home to a rising middle-class population which has been driving demand patterns. This phenomenon to a large extent has fuelled the price inflation in high-value and protein-rich commodities. The pressure is on prices of non-cereal commodities driven by demand expansions and weak and fragmented supply lines. The focus, therefore, is on streamlining the supply chain, reducing the marketing margins and ensuring adequate supply response to increasing demand. Some of the policy measures that India adopted (largely populist in nature and part of the election manifesto) which helped address the concerns arising from the food and financial crisis resulted in inflating the fiscal deficit and adding to the inflation concerns. Increasing the subsidy bill (notably fertilizer) and loan waiver scheme resulted in a ballooning of the fiscal deficit from 4.1 per cent in 2007–8 to 8.5 per cent and 9.5 per cent in 2008–9 and 2009–10, respectively (RBI 2011b).

The nature and extent of food price inflation in India has been less severe than in many other developing countries. Although met with severe criticism by the opposition political parties, the flagging of issues by the media, and protests by civil society groups and people in general, the situation did not result in riots or major clashes. As for grains (rice, wheat, and maize), domestic prices have been fluctuating but their contribution to overall food inflation has eased out over time. Rising energy prices also contributed to a rise in inflation. The period of high food inflation has brought food security concerns to the forefront and there is a renewed interest among the representatives of the government, and the policy think tanks to devise strategies to control prices and smooth out the impact of these price spikes on consumers. While immediate actions were taken to control price spikes, some of the medium- to long-term policy actions are aimed to ensure sustainable growth in agricultural productivity and food production. In the wake of the crisis, this policy stand has been further strengthened although a consensus on the strategic approach is missing. Indian agriculture and food policy measures have been conservative. While the trade restrictions and building up of stocks helped contain flaring up of grain prices on the domestic front, India has been criticized for having adversely affected the global situation.

(p.360) Overall, it seems the policies and political debates have ensured that there is ample food in the country, that the real wages of farm workers have gone up, and now the challenge is to bring down food inflation by controlling fiscal deficits, retaining somewhat tight monetary policy, improving the supply chains, and honing the social safety net programmes, besides improving productivity and overall food production in the country, and releasing more from the public stocks.

References

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Notes:

(1) The monthly inflation is measured as percentage change of the wholesale price index of the month in the current year over the same month in the previous year.

(2) The headline inflation measures the overall inflation within an economy and is significantly influenced by sudden price spikes in food or energy sectors.

(3) Food articles include food grains, fruits and vegetables, milk, eggs, meat and fish, condiments and spices, tea and coffee.

(4) Manufactured food products include dairy products, grain mill products, bakery products, sugar, khandsari and gur, common salts, sugar and confectionary, edible oils, oil cakes, processed tea, coffee, cattle feed, and malted foods.

(5) ‘Petrol price cut by Rs 2.22’. The Hindu, 15 November 2011. Available at: <http://www.thehindu.com/news/national/article2630325.ece>.

(6) ‘India Faces Food Price Discontent Violent Protests’. Reuters, 28 January 2010.

(7) ‘India opposition parties strike over high food prices’. BBC News, 27 April 2010. Available at <http://news.bbc.co.uk/2/hi/8645725.stm> and ‘Thousands protest against high food prices in Delhi’. BBC News South Asia, 23 February 2011. Available at <http://www.bbc.co.uk/news/world-south-asia-12549050>.